Loading the player...

What is 'Writing An Option'

Writing a put or call option refers to an investment contract in which a fee is paid for the right to buy or sell shares at a future date. Put and call options for stocks are typically sold in lots of 100 shares.

Breaking Down 'Writing An Option'

Writing an option is a fundamental investment strategy dating back to ancient times in which an investor seeks to make money by correctly predicting future price movements in a stock or commodity. For example, a farmer growing corn may believe that current drought conditions will not persist into the next growing season, so he writes call options on the future price of corn. As the buyer of corn options, the farmer is granted the right to buy at a specified price in the future. This type of buy option is known as a call. The seller of an options contract must sell at the specified price, so in this case the farmer hopes to buy low and reap the rewards of the improved growing conditions for commodities once the drought ends.

Options contracts are commonly used as a short-term trading strategy by stock investors looking to make money from their charting observations. Day traders use a variety of charting techniques to identity the trading ranges of a stock, with particular attention given to the reversal zones when a price begins moving in the opposite direction from recent movements. When writing an option, the price of the stock or commodity available for sale or purchase is known as the strike price. The strike price intervals vary when the contract is written, with higher-priced equities typically using $5 intervals while lower-priced equities use $2 intervals.

An options contract will have an expiration date typically occurring in calendar year quarters. The fee, or premium, paid when writing an option depends upon several factors including the current price of the stock, when the strike date occurs and other factors such as the asset’s volatility.

Writing an Option in Ancient Times

As is true for many modern trading concepts, the origins of writing an option date back to ancient times. Aristotle, the Greek philosopher who wrote about many topics, recorded an early example of options trading in his seminal work Politics. The philosopher and mathematician Thales of Miletus studied astronomy as a way to predict olive harvests for his region. Thales believed there would be a coming bountiful olive harvest, but did not have the money to buy his own olive presses, so instead paid a fee for the right to access the olive presses of others.

In essence, this was an example of the first options contract as he bought the right to an asset but not the obligations of ownership. When it turned out he was correct and a bountiful olive harvest did follow, he exercised his option in gaining access to the olive presses, thus benefiting from his speculation on the future.

  1. Options On Futures

    An option on futures gives the holder the right, but not the ...
  2. Listed Option

    A listed option is a derivative security traded on a registered ...
  3. Vanilla Option

    A vanilla option gives the holder the right to buy or sell an ...
  4. European Option

    A European option can only be exercised at the maturity date, ...
  5. Put Option

    A put options gives the owner the right to sell a specified amount ...
  6. Exchange-Traded Option

    An exchanged-traded option is a standardized contract to either ...
Related Articles
  1. Trading

    Beginners Guide To Options Strategies

    Find out four simple ways to profit from call and put options strategies.
  2. Investing

    Why Options Trading Is Not for the Faint of Heart

    Trading options is not easy and should only be done under the guidance of a professional.
  3. Trading

    A Quick Guide To Debt Options

    Options on debt instruments provide an effective way for investors to manage interest rate exposure and benefit from price volatility, learn more today.
  4. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  5. Trading

    The Basics Of Option Price

    Learn how options are priced, what causes changes in the price, and pitfalls to avoid when trading options.
  6. Trading

    Call options: Right to buy versus obligation

    Learn what a call option is, how buyers and sellers are determined, and what the difference between a right and an obligation is for options investors.
  7. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  8. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  1. When is a put option considered to be 'in the money?'

    Learn about put options, how these financial derivatives work, and when put options are considered to be in the money related ... Read Answer >>
  2. 4 Ways to Trade Options

    Without a good understanding of option trading, terms like "buy to open", "sell to open", "buy to close", and "sell to close" ... Read Answer >>
  3. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options ... Read Answer >>
Trading Center